Saturday, December 24, 2011

Oblivion

Merry Christmas. Happy New Year. Best wishes to you and yours. May you have a wonderful holiday season.

Now that we have that out of the way, let's get down to brass tacks. 2011 is coming to close with the U.S. economy looking no stronger than it did a year ago. The world economy is in a state of flux. The Arab Spring is quickly becoming the Arab Winter. Republican Presidential hopefuls are continuing their circus acts. And it's become next to impossible to find a decent pork chop out there.

But we'll limit today's discussion to just the first item, the U.S. economy. To supposedly boost the sagging economy, Congress and the President have gone ahead with their oh-my-god--it's-so-incredibly-stupid plan of extending the payroll tax holiday by two months, as if this measure actually had anything to do whatsoever with the dopey metric of "job creation."

And that metric--job creation or "created jobs"--became common terminology after the stimulus package of 2009. When the metric faltered, when actual empirical data demonstrated how it was being misused, it was supplemented by the even-more-dopey metric of "saved jobs."

The current struggle for the administration in this regard is making the case that either are both metrics are useful for measuring the effectiveness of current policies, chief among these being the payroll tax holiday and the extension of unemployment insurance benefits. For wrapped up in the bill that extends the payroll tax holiday is an extension of unemployment benefits for two months.

Another extension of unemployment benefits.

And somehow, economic theory is being twisted to argue that such an extension benefits the economy, even though it is now settled fact--even among people like Paul Krugman--that the only demonstrable consequence of such an extension is a decrease in employment. The idea that this extension, along with the payroll tax holiday will create or save jobs is laughable, yet the argument is being made, again and again and again.

Of course, the problem that many on the left have--when it comes to "fixing" the economy--is that what they really want done, what they really want to see, is another massive stimulus bill. And given the current make-up of Congress, that is just not going to happen.

But suppose it could happen? Is there any chance it would be a good idea, would have the desired impact on the economy? The same economists and thinkers that opposed to first Stimulus Bill would certainly say no. And no doubt, the same ones that argued for the first would--by and large--argue for a second. But as Robert Samuelson deftly points out, there is another danger, one becoming all too likely because of events in the EU:
For the record, I supported Obama's stimulus -- though disliking some details -- and, under similar circumstances, would again. The economy was in a tailspin; the stimulus provided a psychological and spending boost. But how much is less clear. As Romer notes, estimating the effect is "incredibly hard." For example, the Congressional Budget Office's estimate of added jobs from the stimulus ranged from 700,000 to 3.3 million for 2010. 
Suppose a new stimulus -- beyond renewal of the payroll tax cut -- did succeed at significant job creation. By piling up more debt, it would still risk aggravating a larger crisis later. There is no long-term plan to curb deficits. Americans seem to think they're invulnerable to a bond market backlash. Economist Barry Eichengreen, a leading scholar of the Great Depression, is dubious: 
"Given low interest rates and the still-weak U.S. economy, it will be tempting for the U.S. government to continue running deficits and issuing additional debt. At some point, however, investors will recognize this behavior for the Ponzi scheme it is. ... If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified."
Imagine the consequences if the bottom drops out of the U.S. bond market. There will be no entity large enough to buoy the government, as the numbers are just too big. There was a great deal of fear-mongering, with regard to the consequences of not raising the debt ceiling, supposition that not doing so would cause a default. This was complete nonsense. But not so, here. The bond markets can react very quickly; investors--including large institutional ones--will get out if they need to. And the ability of the government to borrow money will come to an end. Default would be a given.

In such a situation, a payroll tax holiday would be an impossibility, as no monies could be borrowed to make up the difference in the Social Security Trust Fund. Extending unemployment insurance benefits would be just as impossible, as there would be no source for the funds. And this is worth noting, since the viability of these extensions is as important--if not moreso--than their supposed benefits.

Plans to curb runaway government spending and prevent fiscally unsound policies are attacked as being "austerity" measures. But they're not; they're rational solutions to combat a long term problem that few in Washington DC are willing to face, for it's just easier to pass the buck. At some point, that buck has got to stop. But there is little evidence that this will happen. Common sense has passed into oblivion.

Cheers, all.

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